Policies Support for agriculture

Support to agriculture in the European Union has declined gradually since the 1990s. Support to producers as a share of gross farm receipts (%PSE) has stabilised at around 19% since 2010. Although support in the form of price distortions has been reduced substantially, trade protection measures (including import and export licensing, Tariff Rate Quotas (TRQs) and special safeguards) remain in effect for a number of sectors.

Overall levels of market price support declined in 2019, as the gap between domestic and world prices narrowed for some of the most protected products.

Production distortions from payments have also declined since the early 2000s and most payments today do not require production. Payments not requiring production accounted for 41% of support on average in 2017-19. At the same time, more payments are contingent upon environmental compliance – more than 60% of payments to producers are conditional on mandatory environmental constraints, and an additional 14% of payments to producers come from voluntary agri-environmental schemes with conditions that go beyond the mandatory requirements.

The greatest share of overall support to the agricultural sector (TSE) goes to producers (89% in 2017-19). Public expenditure for general services to the sector at large (GSSE) relative to total support was 10% in 2017-19, similar to the 9% in 2000-02. However, the composition of GSSE has evolved. Agricultural knowledge and innovation accounts for 56% of the GSSE, up from 42% in 2000-02. Expenditures for both infrastructure and public stockholding have declined over the period, falling respectively from 27% and 15% in 2000-02 to 15% and 1% in 2017-19.

Main policy instruments

The Common Agricultural Policy (CAP) is the main agricultural policy framework of the European Union. In addition to the CAP, Member States may implement measures funded from national or sub-national budgets that target specific sectors (including agriculture) or objectives, as long as they comply with the European Union’s state aid rules and do not distort competition within the common market (OECD, 2017[9]).

The CAP typically covers a seven-year period, currently 2014-20. It is composed of two pillars: the European Agricultural Guarantee Fund (EAGF) finances Pillar 1, and measures under Pillar 2 are based on Rural Development Programmes (RDP) co-financed by the European Agricultural Fund for Rural Development (EAFRD) and EU Member States.

Member State RDPs are deployed over the seven year CAP programming period. The CAP 2014-20, while in many ways the continuation of the CAP 2007-13, offers a number of novel features (OECD, 2017[9]).

The implementation of the CAP 2014-20 started in 2014 with the first measures under Pillar 1, followed in 2016 by the implementation of 118 national and regional Pillar 2 Rural Development Programmes (RDP) in the Member States. Later in 2018, the CAP simplification took place within the revision of the EU financial rules, also known as the Omnibus regulation (OECD, 2018[10]). Furthermore, the CAP had provided for opportunities at set times during implementation when Member States could review and notify adjusted decisions with regard to several choice measures.

The overall budget for the CAP over the 2014-20 period was set at EUR 408 billion (USD 457 billion), of which initially 76% were allocated to Pillar 1 (covering market related expenditure and direct payments), and the remaining 24% to Pillar 2 (rural development spending, including agri-environmental payments).

The CAP 2014-20 allows Member States to transfer up to 15% of each envelope between the two pillars. Over the period, twelve Member States transferred funds from Pillar 1 to Pillar 2, while five Member States transferred funds from Pillar 2 to Pillar 1; with a net overall result of EUR 3.76 billion (USD 4.21 billion) transferred from Pillar 1 to Pillar 2 over the period (EC, 2019[11]).

Pillar 1 defines and funds market measures under the common market organisation, as well as direct payments – mostly per hectare payments that do not require production (see next paragraph).

To this end, entitlements to direct payments were assessed and allocated for the entire period of the CAP 2014-20 to those deemed to be active farmers through the exclusion of a number of activities and businesses, known as the negative list. More flexibility was introduced in the active farmer condition in 2018. Most Member States abandoned the negative list, while some country specific alternative criteria were used to prove farming activity in those that continue to apply it.

The Basic Payment Scheme (BPS) and the Single Area Payment Scheme (SAPS)

The Basic Payment Scheme (BPS) and the Single Area Payment Scheme (SAPS) – the BPS equivalent that offers a uniform per hectare payment rate in all but three Member States which joined the European Union after 2000 – make up 51% of the EU direct payments envelope on average in 2019 and 2020. Wide variations across Member States are observed that reflect Member States’ spending choices on optional measures under Pillar 1. Both the BPS and the SAPS are conditional to cross-compliance requirements, although exceptions apply.

Additional conditions are attached to the per-hectare Greening payment that accounts for 29% of the Pillar 1 direct payments budget. As of 2017, farmers who do not comply with all the requirements of greening may be subject to new greening administrative penalties (equivalent to 20% of the farmer’s greening payment in 2017, and raised to 25% from 2018 onward) in addition to forfeiting a share of the greening payment on the non-compliant area.

In the ten Member States that apply the SAPS, commodity-specific payments may be granted from national budgets within limited envelopes.

The Transitional National Aid (TNA) can be disbursed as decoupled payments while a fixed share may be spent on current production. They may apply on a per area basis to arable land, hop and starch potatoes; on a volume basis to milk; and on a headage basis to other livestock. Member States may review TNA budgets and supported commodities on an annual basis. The maximum TNA payments allowed decreases gradually from 75% of the 2013-level of SAPS aid in 2015 to 50% in 2020.

As the CAP 2014-20 is implemented, the gap in per-hectare payment rates of the BPS and the SAPS is set to narrow, both between countries (external convergence) and between regions within countries (internal convergence). Internal convergence applies to the regionalised BPS while, under the SAPS, a uniform payment rate at national level already applies to each hectare. In the CAP 2014-20, Member States may choose to allocate part of their direct payments envelope to commodity specific payments within defined ceilings (up to 13%) and under defined conditions.

The voluntary coupled support (VCS) expands the coupled support scheme under Article 68 of the previous CAP 2007-13 and offers Member States the choice to allocate a larger envelope to more sectors or regions and under a wider set of specific conditions. Such support may be granted to create an incentive to maintain current levels of production in the sectors or regions concerned. Choices of Member States on the take-up of the VCS vary greatly, both in terms of the level of support and the commodities supported. On several occasions, Member States have reviewed VCS budgets and commodity attributions, making some minor adjustments. All Member States, except Germany, have chosen to offer VCS, using 10% of the EU direct payments budget on average. This compares to the 3% that was spent previously under Article 68 coupled support, as reported in the European Union’s general budgets.

A top-up payment to young farmers, in addition to the BPS and SAPS, applies in all Member States. In 2019, this payment accounts for 1.4% of the European Union’s direct payments envelope, as reported in the general budget. Member States have chosen to implement this measure in different ways. Some offer recipients a flat payment rate on a limited number of hectares, while others apply a payment proportional to the BPS or SAPS received. In addition to this compulsory young farmer scheme, 25 Member States have chosen to attribute a portion of their rural development envelopes to support young farmers, representing 4.5% of total rural development expenditures (ENRD, 2016[12]). The bulk of this spending is directed toward business development and investments.

Small Farmers Scheme

Fifteen Member States have chosen to offer small farms simplified payment attribution conditions – the Small Farmers Scheme – that waives the requirements attached to the greening payment and cross-compliance. The payment cannot exceed EUR 1,250 (USD 1,399) per farm and, depending on the method chosen by the Member State, the overall envelope may be limited to 10% of national direct payments. Denmark and Slovenia implement the Pillar 1 direct payment to Areas with Natural Constraints (ANC). Under this payment, the ANC are defined based on eight biophysical criteria. Denmark uses 0.3% and Slovenia 1.6% of their national direct payments envelope for ANC payments (EC, 2019[11]).

Less Favoured Areas

A payment targeted to areas with natural or other specific constraints can also be budgeted under the RDP, labelled as the Less Favoured Areas payment in the previous CAP. It is implemented in 25 Member States using 21% and 19% of Pillar 2 public expenditure funds (including Member States’ contributions from national budgets) in 2018 and 2019, respectively. In the past, Member States used up to 140 different criteria for assessing ANC status for Pillar 2 payments. However, these have been consolidated into the same set of eight biophysical criteria that applies to Pillar 1 ANC payments. Ten Member States or regions have chosen to grant higher payments to the first hectares under the so-called redistributive payment, using 4.1% of the European Union’s direct payments envelope as reported in European Union’s general budget. Member States that implement the redistributive payment may choose to opt-out from so-called “degressivity” and six Member States and regions have chosen to do so. Under degressivity, BPS amounts above EUR 150 000 (USD 167 908) per recipient are reduced by a minimum of 5%. Funds deducted under this provision are transferred to Pillar 2 and used to fund the Member State’s RDPs. Fourteen Member States20 have chosen to apply the minimum reduction.

Ten Member States have used the possibility to increase the amount that is exempt from the 5% reduction by the value of salaries paid. Ten Member States have chosen to apply a full cap on the BPS at levels varying from EUR 150 000 (USD 167 908) to EUR 600 000 (USD 671 630).

A Crisis reserve is earmarked to be used in case of emergency situations. It is funded from the Pillar 1 direct payments budget. If it is not used in the current year, the envelope is reverted for distribution as Pillar 1 direct payments in the same year. The crisis reserve is renewed each year and has not been used up to now as an emergency fund.

POSEI scheme (Programmes dʼOptions Spécifiques à lʼEloignement et à lʼInsularité) or supports to farming in the European Union’s outermost regions

The POSEI scheme (Programmes dʼOptions Spécifiques à lʼEloignement et à lʼInsularité) supports farming in the European Union’s outermost regions by using production-related payments. The scheme supports access to food, feed and inputs for local communities, and also the development of local agricultural production with 1.1% of the direct payments envelope in 2019. Pillar 1 also funds measures that support commodity markets, representing 4.4% of the overall agriculture and rural development budget in 2019. Prices paid to EU domestic producers averaged 4% above world market prices in 2017-19. While the possibility exists for public intervention for cereals (namely common and durum wheat, barley and maize), it has not been applied in recent years. Purchase at the cereal intervention price is limited to 3 million tonnes of common wheat, beyond which purchase is by tender. Public intervention for durum wheat, barley and maize can be opened under special circumstances by means of tendering. Public intervention also applies to paddy rice. Until 30 September 2017, sugar was supported through production quotas, coupled with a minimum price for sugar beets. After the end of the sugar quota regime, existing provisions for agreements between sugar factories and growers have been maintained, and white sugar remained eligible for private storage aid. The support regime for cereals and sugar also includes trade protection through tariffs and tariff rate quotas (TRQs).

Export subsidies or export refund

No export refunds have been granted since July 2013. Furthermore, since the WTO Ministerial conference in Nairobi in December 2015, the European Union has committed not to resort to export subsidies. The CAP Reform proposal includes the elimination of the legal base for the European Union to grant export refund/subsidies in any sector.

Fruits and vegetables

Fruits and vegetables are eligible for voluntary coupled support and commodity specific payments; they are also supported through various market measures. These include crisis intervention measures that may be managed by producer organisations, an entry price system (minimum import price) for some products, and ad valorem duties, but no export subsidies. Support co-financed by Member States also applies to the fruit and vegetables sector as well as the olive oil and table olives sectors. These support a wide range of actions from production planning, quality measures, market withdrawal and harvest insurance to training, promotion and communication. Some of these measures apply at farm level while others are provided to producer organisations or to the sector at large.

Private storage may also be activated as an optional scheme for olive oil and flax fibre. In the CAP 2014-20 the rules on recognition of producer organisations and inter-branch organisations are expanded beyond fruits and vegetables. Compensation may be greater when producers claim support via producer groups, as was the case with compensation payments related to the Russian Federation’s embargo on imports.

Also targeting the fruit and vegetables sector, a consumer support system directed toward schoolchildren covers the consumption of fresh fruits and vegetables, processed fruits and vegetables, and banana products. The scheme’s budget has grown rapidly from EUR 29 million (USD 32 million) when it was first implemented in 2010 to EUR 117 million (USD 131 million) in 2016.

A similar scheme supported milk consumption for schoolchildren, with a budget of EUR 64 million (USD 72 million) in 2016. In August 2017 both schemes were merged under the title “School Schemes” and the budgets combined into EUR 215 million (USD 241 million) in 2019.

Dairy sector

In the dairy sector, intervention prices are used for butter and skimmed milk powder, together with import protection. Intervention purchases at fixed price cannot exceed 50 000 tonnes for butter, and 109 000 tonnes for skimmed milk powder (SMP), representing 2% and 7% of production, respectively, in 2019. Above those limits, purchase is made by tender. No intervention buying-in took place in 2019.

Beef market and sheep meat

The beef market is supported by floor prices, tariffs and TRQs. Support for pig meat is provided by import protection. For sheep meat, the market support regime is comprised of tariffs and TRQs, with most country-specific TRQs subject to a zero customs duty. TRQs also support the poultry and eggs markets. Private storage may be activated as an optional scheme for butter, SMP, certain cheeses, beef, pig meat, sheep meat and goat meat.

Milk and milk products

Furthermore, specific provisions are made for milk and milk products. The wine sector is supported through a system of authorisations for new vine planting.

Wine

Since January 2016, new vine planting is authorised, but is limited to 1% of the planted vine areas per year. Authorisations would be automatically granted to producers to replace grubbing of an existing vine area. Member States have up to 31 December 2020 to transition to the new system. The sector is also supported through promotional measures, both in the European Union and in third countries, restructuring and conversion of vineyards, compensation for green harvesting, setting up mutual funds, investment in tangible and intangible capital, income insurance, development of new products, processes and technologies, and distillation of by-products.

Rural Development

Rural Development is part of the EU-level Common Strategic Framework covering all support from European Structural and Investment (ESI) funds (the EAFRD, ERDF, Cohesion Fund, ESF and EMFF) in Member States through partnership agreements.

The EAFRD uses Pillar 2 of the CAP 2014-20 to serve six priority areas: 1) fostering knowledge transfer and innovation;

2) enhancing competitiveness of all types of agriculture and the sustainable management of forests;

3) promoting food chain organisation, including processing and marketing, and risk management;

4) restoring, preserving and enhancing ecosystems;

5) promoting resource efficiency and the transition to a low-carbon economy; and

6) promoting social inclusion, poverty reduction and economic development in rural areas.

Rural Development Programmes (RDP)

Pillar 2 funds are implemented through national (or regional) Rural Development Programmes (RDP). RDPs also support projects that use the “LEADER approach” (Liaison Entre Actions de Développement de l’Économie Rurale) – i.e. relying on a multi-sectoral approach and local partnerships to address specific local problems; and technical assistance for the implementation of Pillar 2 measures. The implementation of RDP 2014-20 had a delayed start and by 2018, most payments for programmes within the RDP 2007-13 had been terminated. At the same time, payments for farm restructuring under CAP 2007-13 were prolonged, including early retirement, conversion of arable land into grassland, and afforestation of agricultural land.

Member States participate in the funding of Pillar 2 payments

Member States participate in the funding of Pillar 2 payments (also called co-financing) in accordance with the RDPs that cover the entire duration of the CAP cycle. In their plans, Member States can choose from a menu of 19 measures to meet the six priority areas of Pillar 2. Two conditions apply: a minimum 30% of rural development funding from the EU budget must be spent on measures related to the environment and climate change adaptation, including forestry and investments in physical assets; and another 5% must be spent on the LEADER approach. On average and at EU28 level, the greatest share of the new RDP budget is allocated to three measures: Investments, Agri-environment and Climate, and Areas with Natural Constraints. While Member States’ choices vary, investment is one of the top three measures receiving the highest shares of expenditure for the period 2014-19 in all but four Member States.

European Innovation Partnership for Agricultural productivity and Sustainability (EIP-AGRI)

The launch of the European Innovation Partnership for Agricultural productivity and Sustainability (EIP-AGRI) in 2012 was followed by integrating the Horizon 2020 programmes specific to research and innovation in agriculture into the CAP 2014-20. The focus of the Horizon 2020 programmes relevant to agriculture is on securing sufficient supplies of safe and high quality food and other bio-based products. The Horizon 2020 budget under the agriculture and rural development title has increased substantially since it was initiated in 2013 from EUR 1 million (USD 1.1 million) to EUR 257 million (USD 288 million) in 2019. A total of EUR 3.8 billion (USD 4.3 billion) is available for the period. Programming for CAP 2014-20 was originally set to conclude this year. However, the next iteration of the CAP is still under negotiation (see “Domestic policy developments in 2019-20”).

Main policy changes

Much of the policy discussion in 2019 and early 2020 was dedicated to shaping the next iteration of the Common Agricultural Policy (CAP). In that vein, the first tranche of transitional regulations needed to bridge the gap between the current CAP and the future one was approved by parliament in December 2019, with the new CAP not expected to enter into force before January 2022.

In addition, EU rules on state aid for Member States were revised in 2019. The Commission raised the maximum amount of support that individual farmers can receive to EUR 20 000 (USD 22 388) per farm over three years without the need for prior approval by the European Commission. Various regulatory changes outside of the CAP, but with implications for the agricultural sector, went into effect in 2019. These included new rules that banned certain unfair trading practices in the agricultural industry, strengthened food inspections, harmonised rules on the sale of fertiliser, and established harmonised risk indicators for pesticides across Member States in order to facilitate the monitoring of trends in pesticide risk reduction at Union level. At the Member State level, a host of policy changes focused on the agri-environment and climate. Countries implemented new regulations aiming to improve air quality and reduce ammonia emissions, improve water availability and quality, improve soil conditions, strengthen the circular economy, and achieve national climate targets.

Contextual information

The European Union is the largest economic region covered in this report, accounting for 20% of the economic activity of all countries covered herein. While the contribution of agriculture to both GDP and employment has declined since 2000, the share of agriculture in the region’s exports increased.

Close to half of the region’s landmass is dedicated to agriculture, with nearly 60% of agricultural area categorised as arable. Crops (including cereals, oilseeds, fresh fruit and vegetables, and plants and flowers) predominate in agricultural output, accounting for 57% of total production. Livestock products – including dairy, beef and veal, pig meat, sheep meat, poultry and eggs – account for the remainder. GDP growth in the region has been positive since 2013, fluctuating around 2% since 2015.

The unemployment rate has declined steadily over that time period, falling from a high of 11% in 2013 to 7% in 2018. Inflation has remained under 2% since 2013. In spite of these positive aggregate indicators, economic conditions vary widely among the different Member States. The European Union has been the world’s largest agro-food exporter since 2013, and remains one of the largest importers as well. The region is a net food exporter, with agro-food products accounting for 6.8% of all EU exports and 5.6% of all EU imports. The region’s agro-food exports are overwhelmingly comprised of processed goods for final consumption (63%), while imports are more evenly distributed among the four categories, with processed goods for industry accounting for the largest share of imports (29%). At 0.5%, agricultural output growth in the European Union over the period 2007-16 was far below the world average of 2.2. Total Factor Productivity (TFP) grew over the period by 1.1% on average, driven by a reduction in primary factor inputs including labour, land, livestock and machinery. Rising TFP has been achieved in the sector along with a reduction of environmental pressures as shown in various environmental indicators. From 2000 to 2018, the region’s nitrogen balance fell by one-third, the phosphorous balance declined nearly 90%, and the share of agriculture in water abstractions fell by 35%. At the same time, agriculture’s contribution to greenhouse gas (GHG) emissions rose by 13%.